Forget about negative rates, it’s time to start listening to economists


But these channels are extremely elusive.In practice, these decisions are dominated by other factors – in particular by opinions about the future. Changes in interest rates also redistribute income between borrowers and savers and their effectiveness will often depend on the different responses of these two groups.

These changes in income can either support the incentive effect or overwhelm it. Under the current circumstances, they could easily overwhelm it, especially since savers in a hurry can respond by spending less.

Additionally, negative interest rates would tend to be reflected in lower government bond yields, exacerbating the problems facing pension funds, whose liabilities are calculated by discounting them at a rate of d. interest dictated by the yield of government bonds.

Lower rates could thus drive many pension funds into deficit, forcing their sponsoring companies to inject more money, thereby siphoning off funds that could have been used for investment. Therefore, a policy supposed to stimulate aggregate demand could in fact have the exact opposite effect.

In addition, negative rates risk reducing the profitability of banks, preventing them from lending more. And they would encourage hoarding of money, which would be both inefficient and dangerous.

Also, they would represent a further development of the Alice in Wonderland character from the current monetary situation, with increased financial distortions that could lead to significant costs down the road.

For example, much of the housing market is currently in the throes of a ridiculous boomlet. Granted, much of this is due to the stamp duty holidays, but cutting official interest rates into negative territory would only throw more fuel on the fire.


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